Volcker Rule Compromise Would Allow Sponsorship, Investment

Jun 23 2010 | 1:41pm ET

The Volcker rule appears likely to lose two of its three main provisions as regards hedge funds and private equity funds.

Senate negotiators, who are working with their House of Representatives counterparts to hammer out differences in their versions of the financial regulation reform bill, are set to suggest allowing banks to sponsor alternative investment funds. The bar on investing in hedge and private equity funds may also be subject to a de minimis exception, leaving the Volcker rule to bar only bank holding companies from owning such funds and from proprietary trading.

The proposed changes are designed to win the support of at least three Republican senators. One of the Republicans who voted for the original bill in the Senate, Sen. Scott Brown of Massachusetts, has been pushing for an exemption to the investing restriction, which could hit custody banks like Boston’s State Street Corp. hard.

Another custody giant, Bank of New York Mellon, said that the rule as written “casts an unnecessarily wide net” and “would prohibit traditional activities that our clients expect from us.”

But allowing even a de minimis exception—allowing banks to invest between 2% and 5% of their capital in alternative investment funds, as industry lobbyists are pushing—might imperil some Democratic support for the bill, with Sen. Russ Feingold (D-Wisc.) warning he will oppose any Wall Street reform bill that isn’t tough enough.

In an effort to add some toughness to a weakened Volcker rule, Senate negotiators may also propose eliminating some of the latitude the original rule granted to regulators.

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